The Scope for Inflation Targeting in Developing Countries

IMF Working Papers, October 1, 1997

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The Scope for Inflation Targeting in Developing Countries

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Bibliographic details

• Authors: Miguel A Savastano, Paul R Masson, Sunil Sharma
• Published: October 1, 1997
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451855159.001

Summary findings

• Inflation targeting (IT) serves as monetary policy framework in several advanced economies, where it has enhanced policy transparency and accountability.
• The paper considers the wider applicability of IT to developing countries.
• The prerequisites for a successful IT framework are identified as:
  • an ability to carry out an independent monetary policy (free of fiscal dominance or commitment to another nominal anchor, like the exchange rate); and
  • a quantitative framework linking policy instruments to inflation.
• These prerequisites are largely absent among developing countries.
• Several developing countries could, with some further institutional changes and an overriding commitment to low inflation, make use of an IT framework.

Key policy implications and recommendations

• Strengthen central bank independence to ensure monetary policy is free of fiscal dominance.
• Avoid commitments to another nominal anchor (for example, the exchange rate) if adopting an IT framework.
• Develop and maintain a quantitative framework that links policy instruments explicitly to inflation outcomes.
• Pursue an overriding commitment to low inflation as a precondition for successful IT adoption.
• Implement institutional changes that create the necessary conditions for IT in countries where prerequisites are currently lacking.

Context and scope

• The analysis focuses on the applicability of inflation targeting to developing countries and contrasts experiences with advanced economies where IT has already enhanced transparency and accountability.
• Subjects covered include: Banking, Central bank autonomy, Central banks, Exchange rates, Foreign exchange, Inflation, Inflation targeting, Monetary policy, Monetary policy frameworks, Prices.

The Scope for Inflation Targeting in Developing Countries — Miguel A Savastano, Paul R Masson, Sunil Sharma; October 1, 1997.

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• The Scope for Inflation Targeting in Developing Countries -WP/97/130
  • The Scope for Inflation Targeting in Developing Countries -WP/97/130 (Markdown version)
  • The Scope for Inflation Targeting in Developing Countries -WP/97/130 (PDF)